How does on-demand insurance company Trov prevent insurance fraud or high prices?

Question

There is an insurance/tech start-up called Trov. Their mobile platform allows you to add your possessions to your inventory. (For example, by importing billing info directly from your e-mail) Then, you can turn on and off insurance coverage on items in your inventory by a simple swipe on your mobile phone. You only pay for number of days of coverage. For example, you can insure your camera for a week when you are going on vacation. They call it on-demand insurance.

Insurance fraud detection is an important part of insurance process such that insurance companies allocate a lot of resources to detect improper insurance claims. Insurance companies also generally do not allow taking insurance for high-risk assets. For example, it is not allowed to buy flood insurance at peak flood season and then cancel it when it is over.

My question is, how does Trov, or other start-ups, prevent people from turning on insurance just before very high risk periods? How do they return profit from something that conventional insurance companies purposefully avoid?

Answer 1

Anything can be insured for the right price... this product is offered for devices at higher risk, which would be logical purpose of owner needing coverage for a specific length of time. Typically this would be a type of adverse selection, but TROV targets customers that typically would not require insurance on their device, but as you said they may be traveling and putting their devices at added risk. Like all insurance companies, their Loss Ratio (Losses/Premiums) will depend on the law of large numbers and spread of risk. As we know, the majority of the time trips are taken, electronics make it back home safely.

Like many tech companies, their advantage over conventional insurers is likely low overhead costs. Being on a mobile platform, they likely have a fraction of the claims handling cost of a conventional insurer. Payments are likely automated by linking bank accounts, so there is little transaction cost burden on this company. In short, their operation is likely highly automated with few staff and low expenses, allowing them to take on a higher loss ratio than conventional insurers and still leave room for profit.

Without having ever used this service, I can tell you they likely price in anticipated fraud, the same way Walmart prices in inventory loss (shoplifting) into their prices. I personally would share your concern that it'd be difficult to combat fraud on such a platform, especially with no claims adjusters whom are typically the first line of defense.

Again, I answer this never having used their service, but I work as an Analyst at a large insurer and these would be my assumptions based on what I know of TROV.

Answer 2

For example, it is not allowed to buy flood insurance at peak flood season and then cancel it when it is over.

They are not offering this right now. So it would be interesting to see if they offer this and how they offer this.

For example, you can insure your camera for a week when you are going on vacation. They call it on-demand insurance.

They segment Trov is targeting consumer electronics. More often people don't take insurance in this segment as the insurance cost is high and benefits low. However if going on vacation, most are afraid of loosing / damaging equipments. Generally although we are afraid, most often nothing happens. It is this segment; you make the insurance cheap and easy to buy and create a new segment.

Insurance fraud detection is an important part of insurance process such that insurance companies allocate a lot of resources to detect improper insurance claims.

The website does not mention how they process claims. Although it looks easy, they may have a more stringent process. For example what is stopping me from buying an insurance after event; i.e. break my phone Monday, buy insurance on Monday and make a claim on Tuesday saying the phone broke on Tuesday.

Answer 3

There is not necessarily a need to prevent what you describe - 'turning insurance on before high risk situations'. They just need to calculate the premiums accordingly.

For example, if an insurance needs to take 50$/year for insuring your house against flood, and a flood happens in average every 10 years, if you just insure the two weeks in the ten years where heavy rain is predicted, you might pay 500$ for the two weeks.
The total is the same for the insurance - they get 500$, and you get insurance for the dangerous period. In the contrary; if a flooding (unexpectedly) happens outside your two weeks, they are out.
From the home owners view, 500$ for two weeks when heavy rains and floods are expected, and nothing otherwise sounds pretty good, compared to 50$ every year. It is the same of course, but psychology works that way.

Answer 4

I am not familiar with the startup you mentioned, but in general there are three approaches to avoid losing money in insurance business:

• review before policy is issued (underwriting)

• review before claim is paid (claims handling)

• setting high enough rates to cover underwriting losses

The fact that Trov is customer friendly / lax (make your choice of term) when issuing a policy says nothing about their rates or claims payment.

It is even possible they are building a portfolio for sale, and do not really care about the claims performance (policies are sold / customers acquired now, and it takes a time for claims to arrive).